On September 28, 2014 Governor Jerry Brown of California signed a bill that puts a potentially enormous liability risk on the companies that use workers supplied by “labor contractors” that fail to pay all wages due the workers. Assembly Bill 1897 requires client employers to “share with a labor contractor all civil legal responsibility and civil liability for all workers supplied by that labor contractor for… the payment of wages and failure to secure workers’ compensation coverage…”
There are three important exclusions: first, the new law covers “workers provided to perform labor within (the client company’s) usual course of business from a labor contractor.” Businesses with a workforce of less than 25 workers (including the number of workers provided by labor contractors) and businesses with five or fewer workers supplied by labor contractors are not covered. Second, the law defines “worker” to exclude those who are exempt from payment of overtime as executive, administrative or professional employees. Third, the statute specifically excludes bona fide “independent contractors” supplied by a labor contractor, however, non-exempt employees who are found to have been misclassified by the labor contractor as independent contractors are covered by the new law when provided to a client company.
Once again, the government is going after owner operators and making it harder for the truly independent contractors to exist. What has happened to the entrepreneurial spirit here in America? When did it become a crime to make money and be independent? This new law raises a number of questions, which I will try to answer here.
Q: What does this mean for client companies in California that use staffing, recruiting and other firms to supply them with more than five contract workers that are being paid on a 1099 basis? A: Client companies that are prudent will now need to ask whether the labor contractor is treating the workers as independent contractors or employees (i.e., paying them on a 1099 or a W-2 basis) and then determine, for all workers who are on a 1099, whether the contractor has properly classified them as independent contractors. This law, therefore, is likely to propel client companies to insist that any labor contractors that provide them with contract labor have properly classified as independent contractors any workers who are being treated as 1099 workers.
Q: What does this mean for staffing, recruiting and other companies that provide contract labor to clients in California? A: This new law puts a premium on contractors (i.e., firms that supply individuals to perform work for client companies) to make sure that all workers who are being paid on a 1099 are genuine independent contractors under the California law. Otherwise, their clients will likely begin to choose competitors who are more independent contractor compliant.
Q: Does the new law include any new definition of independent contractor? A: No. The law expressly notes it does not change the definition of independent contractor under state law. As noted in my previous columns, California enacted an independent contractor misclassification law prohibiting willful misclassification, but that law likewise does not provide a definition of who is an employee and who is an independent contractor. California, like many states, uses a modified form of the general common law definition of “employee.” California’s test is sometimes referred to as the “economic realities” standard, which is similar (but not identical) to the “economic realities” test used in cases arising under the Fair Labor Standards Act (the federal wage and hour law). Although the economic realities test under California law has a similar starting point as the common law test, the courts in California and the California Labor and Workforce Development Agency give different weight to certain factors than do courts applying the classic common law test for independent contractor status. While both the economic realities and classic common law tests have a number of factors to be taken into account in determining whether a worker is an employee or an independent contractor – for example, the IRS maintained for years its “20 factor test” and the California Labor and Workforce Development Agency lists 11 factors on its website describing the “economic realities” standard – the courts applying these tests have almost universally held that no one factor is determinative under these definitions of “employee.” Thus, because these tests are fact-specific, they can be subject to some confusion, which can result in a number of workers falling into the “gray area” between employee and independent contractor.
Q: What workers (if any) are exempt from overtime and therefore excluded from this law? A: The new law defines “worker” as excluding an “employee who is exempt from the payment of an overtime rate of compensation for executive, administrative and professional employees pursuant to wage orders by the (California) Industrial Welfare Commission described in Section 515 (of the California Labor Code).” Thus, the new law appears to impose shared liability for wages and workers’ compensation obligations on client companies only with respect to non-exempt employees provided by labor contractors. Notably, one of the wage orders described in Section 515 includes, under the “Professional Exemption” section, an employee in the computer software field who is paid on an hourly basis if a number of specific criteria are met; such computer software workers therefore appear to be outside the coverage of this new law. This is important in a state such as California, where there is a heightened need for systems analysts, software designers and engineers, computer programmers, and the like.
Next month I will continue with part 2 of this column and list several more questions and answers, as well as some “takeaways” (exemptions) of the new law. If you have any doubts whatsoever about your independent contractor status or the status of your workers, don’t gamble with your future – we have the solutions you need. Call me at NTA today (800-805-0040) to schedule an appointment for your own risk assessment.